Arizona Leads the Way in Combating Foreclosure

As the Obama Administration works up its 12,487th plan for keeping underwater homeowners in their homes, Arizona’s legislature may have the courage and good sense to do the obvious: let foreclosed homeowners stay in their home as renters. A bill was just introduced in legislature that would allow homeowners in houses that sell for less than the median price to remain in their home as renters for at least one year following foreclosure.

With this simple gesture the Arizona legislature could do more for the nation’s underwater homeowners than all the brilliant DC policy wonks have managed to accomplish in the last three years with all their billions of dollars. The legislation would give low and moderate-income homeowners security in their homes. It doesn’t make them jump through hoops and prove to bureaucrats that they were worthy. It doesn’t require them genuflect before loans servicers or bankers.

This legislation would give homeowners the right to stay in their home. And bingo, every low and moderate-income homeowner in the state would know that the bank could not just throw him or her out on the street. If this passes the banks may also think more seriously about loan modifications, since they couldn’t just throw a foreclosed homeowner out on the street. The proposal doesn’t cost the taxpayers any money. It also doesn’t require any government bureaucracy. It’s easy to see why it’s a non-starter in Washington.

Fortunately, this one doesn’t have to go through Washington. Every state in the country could follow the lead of Arizona. If legislators are tired of seeing people thrown out on the street, if they are tired of seeing foreclosed homes sit vacant and ruin whole neighborhoods, they can just grant underwater homeowners in their state the same rights as are being proposed for homeowners in Arizona.

Of course, this will mean bucking the banks. The banks don’t see any reason that they should suffer just because they made bad loans in the middle of the housing bubble. The banks feel it is especially unjust that they should suffer since they have spent so much money buying politicians who will gladly funnel them taxpayer dollars for mortgage modifications under the guise of “helping homeowners.” The whole point is to keep the homeowners paying money as much as possible as long as possible.

Who cares that underwater homeowners will never get any equity in their homes and that they are paying far more on their mortgage than they would ever pay in rent? The interests of the banks can’t be held hostage to the welfare of homeowners.

So what if homeowners’ debt burdens are dragging down the economy? It is not the banks’ problem if mortgage payments leave consumers little money to spend in other areas. Bank profits are more important than sustaining the recovery.

That may be the view in Washington, but this view may not win out in Arizona. At last a group of legislators are prepared to take serious action to address the problems created by the collapse of the housing bubble instead o just repeating silly platitudes about the importance of homeownership.

Of course, other legislatures can and should go beyond the provisions of the Arizona measure. This act ensures homeowners the right to stay in their home for one year with the possibility of staying longer on a month-to-month basis. It would be desirable to provide greater housing security to foreclosed homeowners by extending the right to rent over a longer period such as 5-10 years. This would give foreclosed homeowners enough time to get back on their feet, to let their kids finish their school and in other ways get their life in order. After all, it wasn’t that fault that Alan Greenspan and Ben Bernanke were too dumb to recognize the largest housing bubble in the history of the world.

But the bill before the Arizona legislature would be a great step forward. Washington may be controlled by people who can only think of ways to help banks, but the Arizona action shows that at least in some states people can get elected who have other priorities. We should hope that this will be the first in a series of state level measures designed to really help homeowners.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.